A contract for difference (CFD) is a financial derivative product. The high leverage provided makes CFD share trading an attractive alternative to trading stocks outright. The best tips for CFD share trading include using a money management system and a well-tested trading system as well as taking any applicable fees into consideration.
Day trading stocks is simplified by CFD share trading. Long and short positions can be entered with margin rates as high as 20:1. CFD share trading is ideal for speculating on short-term price movements of stocks.
Contract for difference trading is highly leveraged. This might be attractive to new traders seeking to gain large profits with a modest capital investment. Leverage is a two way street. Controlling large amounts of stock with a 5 percent or 10 percent deposit can also work against the trader, because losses can add up quickly. The trader should be armed with a good money management system.
Trading systems are rarely successful without a good money management plan. All professional traders use a system of money management. The system can be as simple as setting the maximum loss per trade at 5 percent of the account value. By figuring the maximum loss that a bad trade will produce, the trade size can be determined. This procedure might seem counterintuitive to a new trader, but using this worst-case scenario is exactly what separates the winners from the losers.
After the money management plan has been established, the trader should be using a well-tested system. Discretionary trading is a close relative of gambling. System trading provides for risk management techniques such as placement of stop losses and acceptable risk/reward ratios. Established trading systems can be purchased or rented. The best trading system is the one developed and tested by the individual trader.
CFD share trading involves fees and commissions. CFD margin financing might incur excessive fees if positions are held for an extended period of time. Long-term trading should be avoided with these derivatives. Flat-rate broker fees might be charged upon entering and exiting a position. Commissions might also be charged in the form of a spread, which is the difference between the bid and the ask price.
A fee and commission schedule should be provided by the CFD broker. These fees could be the difference between a winning day and a losing day. Fees should be applied to the trading system and money management plan. Some brokers might charge flat fees plus spread fees, and some might charge a platform fee. Investors should be sure that all broker fees are up front, with no hidden surprises.
There are two types of CFD providers. A direct CFD broker typically charges slightly higher commission rates. This type of broker uses actual live market prices, and buy and sell limit orders can be placed. The spread-betting type of brokers generally charge lower commission rates. In some cases, the data feed provided with their platform must be traded, which might or might not mirror the actual market data.
CFD share trading has not been approved in some countries, including the United States. CFDs are also available for other types of financial assets. Many commodities, indexes and currencies are available in the form of CFD derivatives.